The Sunday TimesBusiness

3rd November 1996



Budgetary expectations

The private sector is riding high on expectations from the budget which is to be presented in Parliament on November 6th. There are several reasons for this heightened expectation. During the last few months the President has met several business interest groups and leaders of industry in the country. They have made various representations to her and discussed the problems they face. Reports reaching us indicate that she has been very understanding of the issues and shown her concern and interest in resolving some of these problems. Several groups have also made written representations which they believe are being considered seriously by the government. These proposals include a need for the government to be consistent in the implementation of policy, to reduce certain taxes and bring down the corporate rate of taxation.

Apart from this, there are other reasons why one could expect the government to fashion the budget in a more realistic manner. There is a greater acceptance on the part of the government that the economy is not doing well. Earlier this year there was a tendency to reject any criticisms about the economic performance on the grounds that they were politically motivated perspectives. Now the government has accepted the position that the economy has been slowing down and that there is a need to stimulate the economy. There is an expectation that some innovative measures to jump start the economy would be forthcoming.

Despite these expectations the possibilities for government action are limited and constrained by the financial realities. The mounting public debt and its servicing cost, the escalating war expenditure, and the governmentÕs commitment to welfare expenditures mean that there are few resources left for capital expenditure. Also the possibilities of increased revenue are becoming even more remote with the slowing down of the economy. It is difficult to see how the government will mobilise resources without creating discontent in the economy and giving relief to business enterprises. Given the difficulties of increased financial resources and a lack of flexibility in curtailing expenditures, the government has few options. There has been a hint of increasing money supply. Whether this implies that the government is changing its policies of containing the deficit and instead proceeding to increase the deficit with a view to increasing government expenditures to stimulate economic activity is not yet clear. We would have to await the presentation of the budget by Prof G L Peiris on November 6th.

Fortunately the economic facts emerging in November are much better than they were around March/April of this year. This lends support to an expectation that the economy might catch up some of the lost ground in the first few months and that we may even reach an economic growth of 4 per cent. This, though inadequate, may suggest a continuing improvement in 1997, when hopefully we would not have an energy shortage, which was one of the crippling blows industrialists faced in 1996. Hopefully the weather gods too would be kinder and the huge import of rice that was required this year amounting to about Rs 400 million in the first half of this year may also be unnecessary next year. The industrial sector which showed slower growth this year may also bounce back. The plantations, which are reaping windfall gains in terms of tea and rubber prices, may continue their upward thrust. So the economy may be looking better in the months ahead and the Minister may justifiably be able to present a rosy picture of the future, even though his expectations for 1996 expressed in the last budget have turned out different.

A budget is a centre piece of a government’s economic policy. We hope that this yearÕs budget, apart from giving concessions, would be one geared to incentives and confidence building which would propel the economy out of the gloomy situation it has got into. It is also hoped that the budgetary measures would look at long term development needs rather than short term political imperatives. The enhancement of capital expenditure is vital in the long run interest of the economy. Whether the government would be able to provide a larger share for capital expenditure in the context of the financial stringency is indeed an acid test of this. The country, particularly the business community, is waiting anxiously for the unfolding of the 1997 budget as most businessmen seem to think that the directions it announces may set the tone for the private sector’s investment strategies.

Tourism seeks special status

Sri Lanka's tourism industry is struggling to survive amidst the civil war and is looking to the forthcoming budget for a measure of relief.

Tourist Hotels Association President, Gilbert Jayasuriya hopes the travel trade would be afforded the status of an export industry as a financial relief measure.

According to him the UNDP Master Plan speaks of the tourism industry as the world's biggest export industry. In Sri Lanka, it is not the biggest foreign exchange spinner today, because of the prevailing internal situation, he says. Nevertheless it is an industry which earns revenue in foreign exchange and should be given the perks and privileges of any export industry, he feels. Negotiations are underway with the government and Mr. Jayasuriya is hopeful of positive results in the coming budget. He also says if the travel trade is exempted from turnover tax it is logical to expect it would also be exempted from the GST.

Confifi Group Chairman, M.T.A. Furkhan says the government cannot ignore the downturn in the tourist trade for two reasons - tourism is significant in earning foreign exchange and providing employment. It is also necessary to maintain Sri Lanka's image as an attractive tourist destination.

He says, "The government being conscious of this has already offered a rescue package by way of a moratorium on loan repayments of hotel companies and a reduction in turnover tax.

He also expects tourism to be declared an export industry. "Consequently I expect tourist industry earnings to be exempted from Turnover Tax/GST on foreign exchange earnings and also in keeping with other concessions offered to the export sector, reduction in income tax pro-rated to the foreign exchange income of hotel companies."

Prof. Furkhan also says the Hotel Association and other Travel Trade Associations and AirLanka have been agitating for a Tourist Promotion Authority. "Whilst the November budget may not spell out details of this new Authority, the hotels industry expect at least an indication the government is willing to consider this important subject of promotion," he said.


By P.M.N. Bandara

Manages well

Hayleys was able to manage its operations successfully to increase turnover, profit and shareholders' funds during the quarter ended 30th June, 1996.

According to the provisional accounts the company's net group turnover increased by 36% from Rs. 1213 m. to 1651 m. Profit before tax was Rs. 140.1 m. This reflects 30% increase over the provision year's corresponding figure. Profit after tax increased by 43% from Rs. 68.6 m. to Rs. 98.5 m. Shareholders' funds increased by 15% from Rs. 3066 m. to Rs. 3541 m.

Mixed results

Hayleys Photoprint reported a sharp drop of profit despite the increase of net turnover for the quarter ended 30th June, 1996.

Company's net turnover up by 19.9% from Rs. 49.1 to Rs. 58.9 m. during the period under review. Profit before taxation dropped by 30.7% from Rs. 2.6 m. to Rs. 1.8 m. Profit after taxation for the period was Rs. 0.9 m. and it shows 25% decline compared the corresponding period in the previous year. However, shareholders' funds increased by 4.7% from Rs. 29.4 m. to Rs. 30.8 m.

7 fold increase

Hayleys Export reported 7 fold increase of profit for the quarter ended 30th June 1996.

Company's turnover increased by 9.4% from Rs. 40.5 m. to Rs. 44.3 m. according to the provisional accounts. Profit before taxation increased by 7 times from Rs. 0.4 m. to Rs. 2.8 m. Profit after taxation was Rs. 2.2 m. and and shows 5 fold increase over the previous year figure Rs. 0.4 m. Increase of shareholders' funds was 45% from Rs. 50.7 m. to Rs. 73.5 m.

Success story

Bogala Graphite Lanka ended up with Rs. 9.1 m. loss during the year ended 31st March 1996. However, this is a story of success compared to the previous year loss of Rs. 74.5 m.

Company's turnover increased by 90.9% during the year from Rs. 62.8 m. to Rs. 119.9 m. Accumulated losses at close was Rs. 114.5 m. after making prior year adjustment etc., compared to previous year accumulated loss of Rs. 105.4 m. Shareholders' funds dropped by 5.5% from Rs. 175.7 m. to Rs. 166.0 m.

The Profit & Loss account shows Rs. 2.3 m. operating profit for the year compared to the previous year loss of Rs. 64.4 m. "This is the first full financial year after new management took office had seen an operational profit", says Chairman, Mr. U.N. Jinasena. The operational profit turned to a loss of Rs. 1.9 m. as a result of writing off good will of Rs. 4.2 m. during the year.

"We look forward to a much more successful year in 1996/97. If market constraints can be overcome, there will not be any doubt about future prospects. The results during the first 5 months of operations in 1995/96 have exceeded on targets", Mr. Jinasena added commenting on the future expectations.

Turnover up

The Finance Company reported favourable operating results for the year ended 31st March, 1996.

Net turnover of the Company for the year increased to Rs. 1400 m. from Rs. 1171 m. during the year showing an increase of 19.5%, over the previous year. Net profit before taxation increased by 3.9% from Rs. 76.9 m. to Rs. 79.9 m. year. Net profit after taxation has also shown an increase of 4.8% from Rs. 61.9 m. to Rs. 64.9 m. However, Shareholders' funds declined by 13.5% from Rs. 565.8 m. to Rs. 489.1 m. during the year.

The Directors of the Company have recommended a first and final dividend of 20% for the year under review.

Call for more incentives, liberalization, less taxes

By Asiff Hussein

The Sri Lanka Apparel Exporters Association (SLAEA) has proposed, the duty-free import of textile fabrics to eradicate the ever increasing menace of smuggling.

The Association, which recently presented a number of budget proposals to the Finance Ministry, has called for further incentives for existing export-oriented BOI enterprises using advanced technology, exemption from turn over tax for manufacturers catering to the export sector and a reduction of income tax in the case of articles supplied by manufacturers to exporters.

SLAEA Chairman Ashroff Omar explained that the Association has proposed that textile fabrics be permitted to be imported duty-free with a view to eradicate smuggling.

He noted that not less than 90 percent of the 606 million square metres of fabric were imported duty free for the apparel export industry in 1994.

"The revenue earned by government on fabric imports was confined to the balance 10 percent or 60 million square metres of fabric which were imported for domestic consumption".

He said that the revenue earned by government on imported fabric for domestic use did not exceed Rs. 1,134 million, which is only about 2.7 percent of the total revenue of Rs. 41.971 million earned by government on all merchandise imports.

"Tariffs imposed on fabrics imported for the domestic market may be an effective protective measure for locally made fabrics, but of what use is this if smuggled fabrics can be sold at cheaper prices than locally made fabrics, thereby defeating the purpose of these tariff measures" he asked.

"If these duties are removed, there would be no incentive for smuggling of fabrics. Consequently, the large outflows of foreign exchange generated by such smuggling will altogether cease and the large sums of money now spent by government on arresting and preventing smuggling, will be saved", he said. He noted that the local textile industry would not be endangered by any duty-free import of fabrics, as the bulk of them would be imported for export purposes. "Any setback to the local industry arising from the small but ascertained quantities of fabrics imported for domestic consumption can be neutralized through a system of subsidies", he said, observing that the cost of such subsidies would be lower than the economic and financial burdens presently suffered by the government due to the large scale smuggling of textile fabrics.

Mr. Omar said that tax incentives should also be granted to export-oriented BOI companies using advanced technology and satisfing BOI criteria as regards investment, employment and export.

The BOI grants a full tax holiday for 5 years, a concessionary rate of income tax of 15 percent for 15 years after the tax holiday, and duty-free imports of project-related goods and raw materials to all new export-oriented enterprises which invest a minimum sum of Rs. 50 million, employ not less than 50 persons and export not less than 90 percent of their output.

Mr. Omar observed that the BOI could achieve better results by encouraging existing enterprises to invest in advanced technology, especially in a context where such enterprises have already proven their export capabilities.

"The existing enterprises which wish to compete successfully in an international market, cannot survive unless they restructure their production facilities by discarding existing machinery which are virtually obsolete and substituting it with specialized machinery in order to be globally competitive" he said.

Mr. Omar said that the SLAEA has therefore recommended that the BOI be directed to extend the tax incentives to any existing BOI enterprise which has exported and will continue to export at least 90 percent of its output subject to its using advanced technology, investing an additional sum of Rs. 50 million in fixed assets and employing no less than 50 additional employees.

SLAEA Chairman further said that his association was seeking exemption from turnover tax, which presently stands at six percent, in respect of transactions in which articles produced by apparel manufacturers have been supplied to direct exporters for the sole purpose of export, regardless of whether such articles are made out of raw materials belonging to the manufacturer or exporter.

He said that where an article produced in a manufacturer's factory out of raw material wholly belonging to a direct exporter for the latter's use, which is a popular method resorted to by manufacturers, is liable to be taxed under the existing turnover tax law.

It said that where a manufacturer produces an article in his own factory out of raw materials wholly belonging to him and then supplies it to a direct exporter, such articles are not subject to turnover tax".

"As a result, a large number of apparel manufacturers who have undertaken the manufacture of articles out of raw materials belonging to exporters, will be forced to pay turnover tax in respect of such articles, even though they are meant for export".

"We have therefore requested the government to withdraw this turnover tax liability on manufacturers", he said observing that both the Ministry of Industrial Development and the BOI are agreed with the SLAEA on the matter.

Mr. Omar further said that his association has also called for a reduction in income tax from the prevailing 35 percent to 15 percent on products supplied by manufacturers to exporters.

"We have proposed that profits derived by the manufacturer from such products should qualify to be taxed under the concessionary rate of 15 percent under the Inland Revenue Act" he said.

Mr. Omar added that due to these restrictive turnover tax and income tax policies pursued by government, exporters have also been severely affected as the manufacturers invariably passed the taxed amount to them, which was an unrealistic situation in the context of a globally competitive market.

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